• Overview. IOI Corporation (IOI) recorded a 13% YoY decrease in core PBT to RM544mn in 2Q23 no thanks to lower contribution from Plantation segment and share of profit from associate amounting to RM2.2mn as opposed to  RM65.2mn recorded in 2Q22. The lower Plantation results was due mainly to higher cost of production and lower CPO and PK prices realised of  RM4,127/MT (-10%) and RM2,163/MT (-41%) respectively. Conversely,  Resource-based Manufacturing (RBM) segment margins was encouraging or to 8.8% from 9.0% in 2QFY22 on account of higher contribution from the refining sub-segment with improvement in margins despite lower sales volume (Table 2 and 3). On a quarterly basis, lower profit (-19% QoQ) was due to 1) a decline in share of profit from associate, BAL (-96.6% QoQ to  RM2.2mn), 2) lower ASP realised of CPO (-8.2% QoQ) and PK (-14.3% QoQ),  and 3) lower margins from oleochemical sub-segment in RBM segment.

• Against estimates: Above. IOI’s 1H23 core earnings came in above our and consensus’ expectations. Core PBT of RM1.21bn was 1% lower than the headline PBT of RM1.17bn due mainly to lower contribution from plantation segment on account of higher cost of production, lower ASP and production of FFB and CPO, and lower share of associate of RM67.8mn (-45% YoY).

• Dividend. The Board declared an interim DPS of 6.0sen for FY23, bringing total cash dividend declared to date to 6.0sen (2H22: 6.0sen), payable on 24  Mar 2023. At the current market price, this translates into a yield of 10.5%.

• Outlook. We remain positive on IOI’s long-term prospects despite the volatility in CPO price and stiff competition from other edible oils that may pose a challenge to its overall business. Its diversified earnings base and sustainable downstream operations could however help cushion the impact of CPO price volatility, in our view.

• Our call: Maintain earnings forecast with a BUY call and unchanged TP of  RM4.75 based on historical low 3-year average P/BV of 2.5x to FY23 BV/share of RM1.90. Our TP offers 24% upside potential from the current price.

Source: BIMB Securities Research - 1 Mar 2023